Veris Residential Inc (VRE) 2006 Q3 法說會逐字稿

Good day, everyone. And welcome to the Mack-Cali Realty Corporation third quarter 2006 conference call. Today's call is being recorded. And at this time, I would like to turn the call over to the President and Chief Executive Officer, Mr. Mitchell Hersh. Please go ahead, sir.

Thank you, operator. Good morning, everyone. And thank you for joining Mack-Cali's third quarter 2006 earnings conference call. With me today are Barry Lefkowitz, Executive Vice President and Chief Financial Officer, and Michael Grossman, Executive Vice President. On a legal note, I must remind everyone that certain information discussed on this call may constitute forward-looking statements within the meaning of the Federal Securities law. Although we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. We refer you to our press release and annual and quarterly reports filed with the SEC for risk factors that could impact the Company.

First, I would like to review some of our results and activities for the quarter, and what we are seeing in our markets. And then Barry will review our financial results, and Mike will give you an update on the markets and our leasing results.

FFO for the third quarter came in at $0.86 per share compared to $0.88 per share for the third quarter of 2005. Our occupancies, however, increased 70 basis points to 91.4% leased in the third quarter compared to last quarter's 90.7%. Most of this increase, about 60 basis points, was due to the positive absorption from Deutsche Bank's expansion at Harborside Financial Center Plaza 1.

Now I would like to give you some general observations. There is no question that the markets remain competitive, challenging, and deals are taking an extremely long time to complete. There doesn't seem to be a real sense of urgency to get those deals done. And while supply is in check in most markets and we are not seeing the corporate give-backs that we have seen over the last couple of years, we still haven't yet seen a substantial increase in demand. And of course, we need more demand to generate overall positive absorption, and to put upward pressure on the rents. But while the recovery has been generally spotty, we are seeing improvements and encouraging signs in several of our markets.

For example, we have seen good leasing activity in Morris County over the last number of months, partially benefiting from corporate consolidations, corporate expansions, and some of the activity through the Cendant breakup. In Jersey City along the waterfront, we have seen a fair amount of activity pick up and velocity increase in terms of space showings and proposals, part -- due to the out flow that is occurring from Midtown Manhattan. We all know and read about the explosive rent picture in Midtown. I think, finally, a number of very large companies are looking at the possibility of moving at least part of their operation to much more affordable space just on the other side of the river.

Our properties in Jersey City are now over 99% leased, as a result of the leasing activity during the quarter at Harborside. To refresh you, Deutsche Bank signed a 10 year renewal and expansion in Plaza 1, totaling nearly 287,000 square feet. You might recall that we renovated this building over the course of the last year, and repositioned it now as a very successful endeavor for the Company. In Westchester activity remains strong. Particularly in the White Plains CBD submarket. Vacancies are tightening there and rents are finally starting to rise. Suburban Philadelphia has been a bit more active this past quarter. Although economic terms and rents are still challenging in those markets.

Now I'll review some of our results and activities for the third quarter. Our tenant improvement and commission expenses were flat, at $3.45 per square foot per year, same as last quarter, even after having accomplished some long term leases which, obviously, employed more capital, such as the Deutsche Bank lease in Harborside. Rent rolled down for the quarter on a Company-wide basis was 1.1% compared to last quarter's 1.7%. When combined with expenses, it is clear that the economics of lease transactions, while remaining competitive, are showing improvements. For the balance of this year, 2006, rollovers are just 1.5% of base rent, or about $8.7 million. And for 2007, rollovers are 9% of base rent, or about $53 million.

In the third quarter we were pleased to announce our plans to exit our remaining western markets, our non-core, non-strategic markets outside of the Northeast Corridor, which was part of our strategic objectives announced a number of years ago. In August, we signed a contract to sell our Colorado portfolio for over $195 million to Westcore Properties. The sale includes our entire portfolio of 19 properties plus land. And the purchaser is employing all of Mack-cali's employees in the Denver and Colorado Springs offices. We also announced plans to sell our interest in our remaining 3 properties in San Francisco. That will mark our final exit from California. We contracted to sell 760 Market Street and 795 Folsom Street also to Westcore Properties for $126 million. In addition, we agreed to sell substantially all of our 50% ownership interest in Convention Plaza in the Yerba Buena district, based on a total building valuation of $82 million to an affiliate of our current joint venture partner. Both transactions are expected to close in the fourth quarter, and so again, we complete a strategic objective of the Company, and do so very profitably.

The sale of our portfolios, in our view, represent a significant milestone for this Company. It will sharpen our focus on our core Northeast and Midatlantic regions. During the third quarter we increased our holdings in Bergen County in New Jersey, which has always been a vital marketplace. We acquired 395 West Passaic Street in Rochelle Park, a building of about 101,000 square feet, a class-A building, for about $21 million. This property is adjacent to our Mack-Cali Center 4. Sits on virtually the same campus, park-like setting, and it is very close to a number of our other mack-Cali properties, in both Paramus and Rochelle Park. So this is a very good strategic fit for our portfolio. We've also purchased a 50% interest in 12 Vreeland Road in Florham Park, New Jersey, 140,000 square foot class-A office building for $6.9 million. A transaction that was precipitated and initiated through the acquisition of the Gale Company.

With regard to our Meadowlands Xanadu project, for those of you who looked at our 10-Q filing, you see that we have reached a deal in principle with Colony Capital and their partners, Mills Corporation and Kan Am, which we find very strategically interesting for our Company going forward. What we are doing is we're selling our interest in the ERC, the entertainment and retail center, back to Colony and their partners for $25 million. You might recall that our total investment in this entire project is $32.5 million. And let me outline for you how this will evolve. We will receive cash at closing, which we anticipate to occur probably next week, of $22.5 million. When we take down any of the sites with regard to any of the office building components or the hotel, you might recall we have the ability to develop 4 440,000-square foot office buildings and a hotel of 520 rooms. Virtually no time limits, optionality and perpetuity, I like to say, with regard to being compelled to build any of that. And when we take down any of those land sites in exchange for an additional 5% interest, and so Colony's interest will move from 20% in our partnership on the hotel and the office, to 25%, they will pay us an additional $2.5 million.

And so at the end of the day, we will have recouped $25 million out of our investment. We will have remaining in the investment $7.5 million. In exchange for which we will have a 75% ownership position, with optionality virtually in perpetuity on 4 440,000-square foot office buildings and a hotel of 520 rooms. In addition to that, we will have the option as a first right of refusal along with Colony, in the event a hotel is built at the track, which would only occur in the event that New Jersey's legislature passes video lottery gambling at the race track. In addition, we are all under discussion with the Giants and Jets about participating in the ancillary developments that they believe will be built around the new stadium. That would include some retail development and similar sports-related activities. Mack-Cali will have drag-along, tag-along rights, so that we can participate in an ownership interest of up to 20% along with Colony's 80% of whatever participation the collective whole has, in those types of activities.

And so we feel that this transaction now has clarity. We will no longer be involved in the entertainment and retail center. We will have optionality on the development of properties that fit within our core strategy, office and hotel, in an area that we believe in the medium to long term will be a very vibrant and successful site and area within the state of New Jersey, served by rail -- passenger rail, which is being built now as we speak, and major infrastructure improvements to the road networks that surround the entire Meadowlands complex.

In addition to that, we are pursuing several other growth opportunities that have resulted from the Gale transaction, and the relationships that have emanated out of that transaction. Our Gale subsidiary will be heading the development of the Belmar Seaport Village, a New Jersey shore town. We recently had a grand opening for the first phase of the project. This is going to be a mixed use residential and retail redevelopment in Belmar, New Jersey, right at the Shark River Inlet. We also plan to invest, and have invested, in Filene's basement mixed use redevelopment project in Boston, which is a venture that we are co-venturing with Gale International and Vornado. As you know, this follows our expansion into the Boston suburban markets when we announced in June the acquisition of what we refer to as the Callahan portfolio, a 7 building portfolio in the northern suburbs of Boston that we did in conjunction with Gale International and JPMorgan Asset Management. During the quarter we were also pleased to announce an increase in our common dividend, now $2.56 per share on an annualized basis. And that was an increase from $2.52, or $0.01 a quarter.

And so I believe that we continue to make significant progress on our strategic plan. We have exited now, or upon the closing which we anticipate to occur before the end of the year, on Colorado and San Francisco. We have exited all our non-core markets. We have completely reshaped the Company in terms of the pallet, now to be a Midatlantic to Northeastern Company. We have expanded our reach into Boston. We are involved in a number of exciting transactions in Boston, including Filene's. And we think this will all evolve into very positive growth prospects for Mack-Cali going forward. And now I would like to turn the call over to Barry, who will review or financial results and activities for the quarter.

Thanks, Mitchell. Net income available to common shareholders for the third quarter of 2006 was $16 million or $0.26 a share, versus $20.6 million or $0.33 a share for the same quarter last year. For the 9 months ended September 30th, 2006, net income available to common shareholders was $75.2 million $1.20 a share, as compared to $79.1 million or $1.29 a share for the same period last year. Funds from operations available to common shareholders for the quarter ended September 30th of '06 amounted to $67.1 million or $0.86 a share versus $66.7 million or $0.88 a share for the same quarter last year. For the 9 months, FFO available to common shareholders was $222.3 million or $2.86 a share versus $205.2 million or $2.71 a share for the same period last year. Other income in the quarter included about $900,000 of lease termination fees, and for the 9 months thus far, we had about $3.1 million of lease termination fees.

Same store net operating income, which excludes lease termination fees, on a GAAP basis, I am happy to say, increased by 4.8% for the third quarter of 2006, as compared to the same period in '05. And for the 9 months ended September 30th, 2006, increased by 0.6%. Same store net operating income on a cash basis also increased by 4.1% for third quarter of '06 as compared to the same period in '05, and for the 9 months, decreased by 1.5%. Our same store portfolio for the third quarter was 27.2 million square feet, which represented about 88% of our portfolio. Our unencumbered portfolio at quarter end totaled 256 properties, aggregating 26.5 million square feet, which represents about 86% of the portfolio. At quarter end, out total undepreciated book assets equaled $5.4 billion, and our debt to undepreciated asset ratio was 45%. Our debt to market capitalization ratio was 37.5%. The Company had interest coverage of 2.9 times and fixed charge coverage of 2.4 times for the third quarter. For the 9 months we had interest coverage of 3.2 times and fixed charge coverage of 2.7 times. We ended the quarter with total debt of approximately $2.4  billion which had a weighted average interest rate of 6.07%.

For the third quarter, the Company's Board of Directors declared an increased cash dividend of $0.64 a share, indicating an annual rate of $2.56 a share. This represents a 1.6% increase. Our FFO guidance for 2007 of $3.38 to $3.54 a share is based on the following major assumptions: Our midpoint case assumes leasing activity of about 2.7 million square feet, that is lease commencements in 2007 of 2.7 million square feet, versus expirations of about 2.6 million feet. The midpoint also assumes no significant acquisitions or sales, other than our recently announced pending sales of our San Francisco and Colorado assets, which we expect to close by the fourth quarter of 2006, and the reinvestment of a portion of the proceeds of these sales. Also I would like to note that we expect to record in the fourth quarter on a GAAP basis about $60 million of gains as a result of those transactions. Please note that under SEC Reg G, concerning non-GAAP financial measures such as FFO, or funds from operations, we are required to provide an explanation of why we believe such financial measures are relevant and reconcile them to net income. Available on our website at www.mack-cali.com are our supplemental package and earning release, which include the information required by Reg G, as well as our 10-Q. Now Mike with cover our leasing activity. Mike?

Thanks, Barry. As Mitch mentioned, our consolidated portfolio was 91.4% leased at September 30th, compared to   90.7 at the end of the second quarter. We signed 172 transactions totaling more than 966,000 square feet in the third quarter, and retained 90.6% of outgoing space. Our rent rolldown shank to 1.1% on a cash basis, comparing outgoing rents plus escalations to first rents payable after any concession period. The rent roll down was 1.7% in the second quarter, and 4.8 in the first. Lease expenditures, including tenant improvements, and lease and commission costs, averaged $3.45 per square foot per year, equal to those costs in the prior quarter. Lease expirations remaining this year amount to less than 350,000 square feet, which represents 1.3% of leased space and 1.5% of annual rent. We are also making headway on our 2007 rollover and started the fourth quarter with about 9% of leased space and annualized rent expiring next year. Further details on our leasing activity can be found in the supplemental package on our website.

Taking a look at market conditions, we are using information provided by Cushman and Wakefield. Unless otherwise noted, I'll site all overall class-A vacancy rates and direct class-A average asking rents. Before we start with our New York City suburban markets, it is worth noting the continued tightening conditions in Manhattan. At September 30th, Midtown availability stood at 6.3%, Midtown South at 5.6%, and Downtown at 8%. With so little space available and continuing strong demand, asking rents continue to climb, reaching their highest level since the end of 2001. As anticipated, we are seeing increased activity in Jersey City, as tenants seek more affordable alternatives and face a shortage of available large blocks in Midtown. The strong New York City economy is supporting impressive job growth, indicating continued demand for space, and we believe, potential for increased demand in our suburban markets.

Strong leasing activity in Westchester County was not enough to overcome the return of several large blocks of space to the market, resulting in an increase in overall availability to 18%. Despite the increased vacancy, asking rents edged upwards of $30.12. In contrast, the White Plains CBD, which is a convenient alternative to Midtown, saw overall availability decrease this quarter to 11.8%. Mack-Cali's 4.8 million square feet of office and office-plex properties remained 96.1% leased at September 30th, unchanged from last quarter. Lease expirations for 2007 amounted just under 10% of leased space and annualized rent. Market conditions continued to improve in Fairfield County , with availability decreasing to 14.3%. Average asking rents climbed to $31.49. Our 852, 000 square feet in Fairfield was 90.5% leased at September 30th, up from 86.5 as of June 30th. Expirations for 2007 totaled 2.8% of leased space and 3.6% of annualized rent. There continues to be no significant space under construction in either Westchester or Fairfield.

Northern New Jersey experienced brisk leasing activity in the third quarter, bringing vacancy down 2 full percentage points, to 18.5%. Average asking rents increased to $29.05. Looking quickly at some our [inaudible] markets in northern New Jersey, Bergen County's vacancy rate dropped slightly to 24%, Morris County availability decreased marginally to 24.2%. Morris County still has several big blocks of vacant space, the largest of which is the former BASF facility of 970,000 square feet in far western Morris. The Parsippany sub-market, which is home to most of our Morris County holdings, is a little over 16% vacant. In Hudson County, availability decreased from 18.5% to 16%. The Jersey City waterfront posted strong leasing activity this quarter.

And as Mitch mentioned, we are very pleased to announce that with the recent expansion by Deutsche Bank at Harborside Financial Center, our Jersey City portfolio of 4.3 million square feet, is now over 99% leased. Overall, our 13.2 million square feet of space in northern New Jersey was 90.1% leased at September 30th, up from 88.7 in the prior quarter. In 2007, expirations amount to 8.1% of leased space, which represents about 7.5% of total rent for the region. Significant projects under construction in northern New Jersey total about 410,000 square feet, and about half is located in Bergen County, which has been preleased. The balance will divide between 2 projects in Morris County, which are scheduled for delivery within the next 6 months. The unleased space represents only a small percentage of the northern New Jersey market and places no significant burden on supply.

In central new Jersey, overall availability dropped to 19.1%, and asking rents rose to $28.65. This market is characterized by disparate vacancy rates across submarkets. [inaudible] to some large telecom, pharma, and technology firms, the region has pockets that have struggled through the merger and consolidation era. While some areas, such as Princeton, Woodbridge, and Edison, see vacancy rates hovering at or below 10%. Other markets, like the Somerset. upper 287 corridor, are working to overcome vacancy rates in the mid to upper 20s. Our central New Jersey properties, which total 4.9 million square feet, are 90.1% leased, and this is up from 89.8 in June. Roughly 5% of this space, representing 6% of the region's base rent, expires in 2007. As mentioned last quarter, construction activity is relatively brisk, and most active in Princeton. As with northern New Jersey, the unleased space slated for delivery represents only a small fraction of existing inventory.

The suburban Philadelphia market showed continued improvement this quarter, with availability decreasing a full percentage point, to 16.4%. Although asking rents declined moderately to $26.42 this quarter, this nonetheless represents an increase of more than $0.50 over the first quarter rate. In general, fundamentals are improving steadily in this region. Leasing activity, rental rates, and absorption are up, and vacancy rates have dropped for the eighth straight quarter. Now, with 3.6 million square feet in suburban Philadelphia we have a 90.8% leased at September 30th, we're off 60 basis points from the prior quarter, and this was primarily due to the anticipated expiration of a 70,000 square foot space in Blue Bell. For 2007, our turnover is roughly 13% of our leased space and base rent.

In Washington, D.C. demand caught up with construction completions, reducing availability from 11.2% to 9.7%. This is the same rate as at the end of the first quarter, and a 5 year low. The construction boom continues with 5.2 million square feet underway. Half of the space is preleased, primarily to the Federal Government and law firms. Asking rent increased slightly to $46.16. In suburban Maryland, availability decreased 10 basis points to 8%. Mack-Cali's 1.3 million square feet in the D.C. market ended the quarter at 89.9% leased, this is up from 89.2% at June 30th. 2007 expirations total 22.4% of leased space, and 18.2% of total rent.

Mack-Cali's holdings outside the northeast total 1.9 million square feet in Colorado and San Francisco, and were 93.3% leased as of September 30th. As Mitch mentioned, we anticipate closing on the sale of these assets by the end of the year. This will have a net 0 impact on our overall occupancy level. While certain submarkets remain challenging, we're pleased to observe that most continue to show modest gains in occupancy. Our core portfolio markets have not gained the recovery momentum enjoyed by other parts of the country, but we are encouraged by the steady, albeit moderate improvement we have experienced. Mitch?

Thanks, Mike. Before I open the lines to your questions, I would like to address guidance. For those of you who have seen our press release today, you will note that the fourth quarter range for 2006 is $0.84 to $0.86. And this is the first time that we are providing 2007 guidance. For the full year in 2007 we have projected a range of $3.38 to $3.54. Obviously, with a midpoint range of about $3.46. You may recall that when we first posted full year guidance for 2006, the mid range -- the midpoint was $3.40. Using the fourth quarter guidance that I just stated, the $0.84 to $0.86, we should finish the year after stripping out non-recurring and specialty items, somewhere around $3.47. And so that gives you a sense of comparing 2007 guidance to 2006 actuals. And with that, I would now like to take your questions. Operator?

[OPERATOR INSTRUCTIONS] Michael Knott, Green Street Advisors.

Congratulations on the sales of the western market. Talk about, Mitch, can you just update us on the potential land sale in Jersey City that you have talked about for some time? And then also the build to suit opportunities you had mentioned previously?

Sure. Thank you for the compliments on the sale of our western assets. Appreciate that. We think they were good sales for us. Regarding Jersey City, there has really been no change in the status of that. I have previously reported that it lies in the hands of the partner, the contributing land option partner. So right now, we haven't been able to unlock that land, through no fault of our own. The market, however, from the condominium perspective, remains quite active. As it does frankly, for the rental apartment development market in Jersey City at this juncture. So that is the good side of it.

As far as the build to suit activities, I can tell you that there are, and they have been fairly widely reported in the media, several large development discussions going on, and we are in the middle of it. There is a major financial services company that we are meeting with next week, that has a multiple million square foot requirement. And of course, we can accommodate that at Harborside with our 3.5 million feet of developable office land at Harborside. There is also another requirement for a Midtown company that is in the final throes, I'm told, of analyzing how they can bifurcate their requirements, so that they can move some of their people out of Midtown Manhattan. And that is what I alluded to in the beginning part of the call. Now that rents in Midtown have approached, or in some cases frankly, exceeded $100 a square foot, you saw the trade at 350 Park at a valuation of $1,000 a foot. I think companies are taking a look at not only cost of occupancy, but I suspect, frankly, Michael, that if I were a tenant in Midtown, and I had a lease that was, say, aged more than 3 or 4 years with a lot of term left on it, and I am hearing this in the brokerage community as well. Tenants are beginning to subletting some of that space, using it as a profit center, and moving parts of their operation into equally high quality space, but much lower cost.

I have talked on this call before about the fact that we can develop all in, an office building in Jersey City, and second to none in terms of the institutional quality of the building. And I know you have seen all of our properties down there, Plaza 5, 101Hudson, they are every bit as good as any building in Midtown Manhattan from a quality perspective. And we can develop that at sub $400 a square foot all in. If you are looking at valuations now in Manhattan, where you are paying $305 a square foot for land, FAR on the Millstein site, and your all in cost of new development is $1,000 a foot, I know if I were the CEO of a company leasing space, I would have to give serious consideration to that economic difference. And so it has taken more time than certainly I would have liked it to take, in terms of actually signing a lease down in Jersey City for a new development. But I can tell you in earnest, that those discussions are quite active at this point in time. And I suspect that they will expand, as this fervor in Midtown is occurring.

And downtown, there is really no space. Even if they were to build all of the things they are talking about at the Trade Center, you are looking at 6 years before you are going to get deliveries. So I think we are in a pretty good position there. Relative to other build to suit activities, we have an agreement in principle with a major company to build 465,000 square feet in Parsippany. The lease is in the final stages of negotiation. We have a signed letter of intent. We are finalizing the plans for the development. I have every expectation that is going to go forward, and that will employ some of our development land in Morris County. So on the new development frontier, that is kind of what we are looking at right now.

Okay, thanks. And then 1 last question, and I'll get back in queue. Can you comment on the press reports of potential significant property tax hikes in New Jersey?

Well, I haven't seen those specific reports that you refer to. There was some discussion about reallocation between commercial and residential properties, and both the Governor, the Senate President and every politician that I have spoken to says that that is not even something that is going to reach an agenda item. So I don't expect that to be the case. And so the parity that exists on equal taxation, equalizing residential and commercial property, should remain intact. And if anything, every effort is being made to find ways and means to reduce property taxes, not increase them. So I am really not aware of what you are referring to.

Thank you.

Michael Bilerman, Citigroup.

This is [Irwin Gusman] here, with Michael and Jon Litt. Can you talk about JV FFO? It was down about 2 million sequentially. It looks to be related to the Meadowlands. Can you say what that was, and what we can expect?

Yes, as we disclosed this the 10-Q this quarter in connection with the Meadowlands and everybody is aware of the situation with Mills and the restatements and what have you. We received some restated information from Mills which is yet to be audited, quite frankly. But that information showed about $1.4 million of accumulated losses being allocated to us for the period from the inception of the partnership, which goes back to '03 through the end of '05. We recorded that in the current period, as well as another $400,000 related to losses that were allocated to us by Mills for the first 9 months of this year. And that, effectively, is the 1.8, $1.9 million that you speak about.

Okay, is that -- does the third quarter encompass all of the losses, do you think?

They are still going through at Mills and determining with their outside auditors, Ernst and Young, the appropriate accounting for a lot of things that they are dealing with. So at this point in time we haven't had any discussions with the outside accountants. But this is the best information we have. But I would suspect that on an operating basis, you will continue to see some expensing of costs which were previously capitalized. But again, that should go away with the transaction that Mitchell discussed previously on this call.

Okay. Can you talk a little bit more specifically about guidance? Why it looks like the midpoint of fourth quarter guidance is down $0.01 from the current run rate? And given the fourth quarter expected run rate, it looks like about $3.40 annualized. Not too far below the midpoint of your full year '07 guidance. It seems a little conservative.

We are obviously making progress in leasing velocity, and we have improved our occupancy. Margins have compressed, I think, unilaterally, due to expense -- operating expense increases, both the pressure on labor expenses and the more labor intensive elements of operating, cleaning and janitorial and things of that nature. Utility costs have generally increased. We have all experienced that, both from a business and a personal perspective. And real estate taxes certainly haven't diminished. Although I don't agree with the conception that they are going to continue to expand exponentially. But I think based on valuations that have occurred, it is a tough case to make to an appraiser or tax assessor that your taxes should be reduced, when wild pricing levels have been paid for office buildings, whether they are leased or they are empty. So that is part of the issue.

And rents, we haven't yet seen a real demonstration of positive momentum in rent growth, but for, I would say within our portfolio, the Jersey City marketplace. Pretty much everywhere else, perhaps Boston would be another exception to that. Although it is very early for us in the Boston market. Generally rents are, in the suburban markets, are relatively flat. And when we see, hopefully, this continued wave of expansion out of the urban core of, in our case, New York, as a result of the things I mentioned before, we will see positive rent growth. We will be able to mitigate against the margin compression. And that, together with improved occupancy, is going to improve the earnings for the Company.

Just a couple of quick things. What was the contribution from payroll reimbursements in the real estate section? I believe it was $4.6 million last quarter?

What we did there, and I guess we had gotten a lot of comments about payroll reimbursements and having that line item. Just to kind of go back a little bit, payroll reimbursements, when we presented last quarter, was principally coming from the Gale transaction. It represented the contribution from reimbursements for payroll as it related to construction, also as it related to facilities management and other third party management that we do. And I think it was a bit confusing because it was hard to break out. So this quarter, what we did was we reclassified those amounts to include the amounts related to reimbursements from the construction company into construction revenue, and the same for the real estate services. So the numbers are embedded therein. So you don't have that allocation issue.

Okay. And the last thing. Can you talk about cap rates on the West Coast sales?

Yes, I thing that the 795 Folsom Street, for example, was a sub 4 cap rate. And generally, that is what we are seeing. We are seeing cap rates in the 5% range on [inaudible] income. We are seeing good pricing per square foot. Seeing close to $300 a square foot for the South of Market assets.

Thanks, guys.

Jordan Sadler, KeyBanc.

Can you just talk a little bit about --- I want to drill down into the guidance a little bit more. You talked about rental rates a little bit, Mitch. But I think what's implicit and embedded in the guidance for next year is leasing volume - Barry, correct me if I'm wrong - 2.7 million square feet of leasing versus 2.6 million square feet of expiration. So relatively flat occupancy. Can you just reconcile that with the leasing you have done to date, I think probably about 2.8 million square feet on the core portfolio excluding Colorado and San Fran?

Well, first of all, let's say that our achievement for occupancy in 2006 is 92%, and we move it by 50 basis points in 2007. The real issue that surrounds the growth in earnings aside from anything else, is timing. It is when we begin to collect rent. And while we have some pretty large transactions that we're in the final stages of lease negotiations with, in some of the more notable projects, like Kimball Plaza, 30 Knightsbridge, the AT&T properties, among others. By the time we finally get that lease signed, which I do believe is absolutely imminent in a couple of cases, and actually build out the space and start to collect rent, it pushes it to midyear of 2007. And so a combination of the relatively flat rents and the offset on the cash flow, the timing is really what is impacting our guidance for next year.

Okay. And then specifically, you have 1 sizable lease roll, I believe in Jersey City, with Merrill Lynch. Can you just talk about that for a little bit? Do you expect them to resign or is that currently being marketed?

It is being marketed. But Merrill Lynch -- we have had very serious discussions about them taking back substantial amount of that space. And Merrill is also, and I don't think this is a surprise to the market, in the market for a major consolidation right now, that exceeds 2 million square feet. So I think they are in --- when I say consolidation, I am talking their about lower Manhattan occupancy. So I think they are looking at a lot of things, and right now, it is all imminent.

Sure. Okay. That is not put to bed yet. And you think that will probably coincide with their decision on the potential consolidation?

Right. I do.

Where do you think the leases are relative to market?

Well, I think we have demonstrated that the leases in place are probably today, 10 or more percent below market.

And then, just can you characterize your interest in the Reckson assets that are currently for sale in northern New Jersey. About a million square foot portfolio.

I am sure you will be surprised to know that first of all, our acquisition department did not receive that offering. So -- but I am of course, aware of it. And I know what is being offered in that offering through their broker. And frankly, the assets that are being offered for sale are of not particular interest to us, both from a, well let's just say they are not of particular interest to us. They don't fit our strategy.

And what about the other suburban assets from the Reckson transaction with SL Green? Would you have had interest in those assets at all, either in Westchester or Connecticut, or Long Island?

The answer to that is, of course. We -- Reckson has about 5 million feet in Long Island and 2.5 million feet right in dead center Mack-Cali land in Westchester. And some assets in New Jersey, certainly, that we would find of more particular interest to us. So the answer is, yes, we would clearly have been interested.

Would you still be interested? Would you look to make a bid on those assets?

Well, as far as I know, they are not available for sale.

Thank you.

John Guinee, Stifel Nicolaus.

Thank you very much for providing '07 guidance. Can you walk through the thought process at the Board level to increase the dividend $0.01 a quarter, or $0.016, while at the same time having declining FFO and declining FAD, and not covering the dividend out of FAD?

Well, sure. First of all, I think that our prognosis for the future is a lot more optimistic than it was a couple of years ago. As you know, through -- up until, let's say, certainly 2006, and probably mid 2006, we were completely cash flow positive. Where other companies within our space and our sector had been paying anywhere --   well in excess of their CAD and FAD coverage. So we were never in that situation. And generally, we had free cash flow to work with, after complying with all of the tax rules for payout. And now we are entering a period of time where generally there is no inventory, no new inventory competing with us in our markets. There are high barriers to entry. The one thing we need to see a brighter spark on, is the ignition demand, which we suspect is going to continue to occur. We have seen more velocity in many of our outlying markets, although challenging economics, as I pointed out before. And we believe that it will continue to occur in New Jersey as a result of what is happening, particularly in New York.

And so with that prognosis, we feel better about the future. Although the earnings drag, because of the timing issues and putting these deals in place and actually collecting the rent, might be slightly delayed. And so we felt that the de minimis negative impact that the additional  the impact of $0.01 a quarter a share, or $3 million give or take, on the bottom line was certainly sustainable, didn't really impact the overall balance sheet of the Company. And that it was the right thing to do, given the prognosis for the future, the near term future. So that was what we evaluated. And we made the decision at the Board level to raise the dividend $0.01 a quarter.

1 quick follow-up. Given that you have got a lot of proceeds coming in in the next month or 2, any rethinking of your share buyback program?

No.

Thank you.

Lou Taylor, Deutsche Bank.

Can you talk a little bit about your '07 expirations? Other than Merrill Lynch, are there any particular expirations that you are worried about?

Well, I worry about all of our expirations. But anything that is significant -- the real big one, obviously, is Merrill, and the only other one that is of particular note would be Hewlett Packard in our CLP acquisition in Greenbelt, Maryland, which is a fourth quarter expiration. They have 163,000 feet. They have 1 building there. We are in discussions with them. Frankly, we are not too optimistic that they are going to renew, given a whole host of issues surrounding Hewlett Packard right now. And so we have sufficient time in a fairly good market in the metro D.C. marketplace to release that space. So, anything else is a lot smaller, in the 20 to 30, you know a couple 50s here or there. But the real big ones are Merrill Lynch, which is 311,000 feet, and Hewlett Packard of 163,000 and change.

Okay, great. The second question just pertains to the State of New Jersey. Are they helping you at all with regards to attracting tenants in New Jersey [inaudible]?

I am very proud of the way New Jersey has conducted itself in connection with trying to stimulate business activity. In connection with the Deutsche Bank situation, not only were they active and aggressive, but I was able to personally arrange meetings, both with the Secretary of Commerce and the CEO of NJ -- New Jersey EDA, which administrates the BEIP program, the Business Employment Incentive Program, with officials of Deutsche bank. And they put people in touch with -- people from their agencies, in touch with Deutsche Bank to help them fill out all of the necessary applications for both the BEIP grant and a UEZ, or an Urban Enterprise Zone designation. Which at the very least, halves their sales tax burden in New Jersey, and does much more than that in a number of different areas when buying furniture and fixtures and so forth, for their installation. And I would say that within a 4 week period, Deutsche Bank had the certainty of knowing exactly what they had from the State of New Jersey. It was acted upon. The governor signed it.

And so I think that there is a real proactive attitude in New Jersey under the Governor Corzine's leadership to stimulate activity. He is a businessman. He gets it. He knows that we have lost high quality jobs and knowledge-based employment. He can't change what happened when he wasn't there. But he is certainly actively trying to change the situation, now that he is there. So I am very delighted with New Jersey's actions.

Last question pertains to the real estate services segment. Are the volumes that we saw in the third quarter, are they a good run rate for next year? And how about the margins? Do you think you'll see similar margins in this segment in '07?

I think the answer to that is yes. But I will tell you that we are looking at some strategic opportunities, relative to our facilities management group. It is just slightly too early to define that, and I think it will be a good thing for us. I think it will be a business building exercise. So stay tuned for that in the near future.

Okay. Thank you.

Ross Nussbaum, Banc of America Securities.

I will try to be quick. In terms of your 2007 guidance, what are you expecting for mark-to-market? Similar to this year?

The answer is yes.

Okay. So, if we say flattish occupancy, similar mark-to-market, expenses are running higher, same store growth negative 2% to 3%, somewhere around there?

I would think it's probably close to being flat, as it was demonstrated in 2006. But it is about flat.

Does the fourth quarter FFO guidance include a gain on land sales from the 9 acres you are selling out in Colorado?

No, that is part of the bulk sale. So the answer is no.

Okay. So you're not booking those -- Okay. On the development side, I am assuming you are not planning on starting anything spectacularly new outside of Jersey City in New Jersey. But my question is, you have got 1 project in there that is being completed at the end of this year. That is 0% occupied. Can you talk about what the prospects are there?

What are you referring to, Ross?

I believe I saw on your supplemental, and excuse me for not knowing the page number, but is there 1 property that is getting developed, that is getting completed at the end of this year, that had a 0% leasing stat on it. ? It is 100 Kimball.

Oh yes, you are referring to 100 Kimball.

Correct.

In Parsippany. We own 10% of that. That is a joint venture with JPMorgan. And that was a Gale development, and it is 175,000 feet. There is a lease out right now for the entire building.

Okay. Because I remember not knowing about it. So that is why. It's new. Okay. And then last question is on Meadowlands Xanadu. Can you refresh me? I know Mills had put an up-front ground lease payment down for the first, I think it was 10 or 15 years. Right?

15 years from opening. So it hasn't even begun to run. It is $160 million prepayment.

Do you have to start sharing a pro rata amount of that, once you start building? Or is that all Mills' responsibility?

We start paying an allocable share once we take down land.

Okay. Thank you.

Sloan Bohlen, Goldman Sachs.

All questions answered. Thanks a lot.

Ian Weissman, Merrill Lynch.

Barry, last quarter you talked about G&A savings from the Gale transaction. Although G&A was flat this quarter, have you not realized that savings at this point? Or should we assume a $12 million run rate going forward?

We haven't, but we are making strides towards rationalizing some of the G&A there as a result of some of the things that we have done with the moves and what have you, we have been able to reduce some of the square footage that is utilized in those operations, and also some of the rental rates there. And we still are beginning to start to realize some of the synergies. It is too early to tell exactly where that will land, ultimately.

So your guidance for next year assumes $48 million of G&A?

Roughly that number. Correct.

Okay. And looking at the utilities pick up in the quarter, yet recoveries were flat. Is there a delay? Is there a catch up period? Or should we be anticipating a pickup in recoveries next year?

I would say that recoveries will probably grow in general, 60% to 70% of the increases in operating costs get picked up back from as [past years]. So you should see some growth as those move forward. But in terms of quarter to quarter, it is hard to say. What we typically do, is we typically will budget in the beginning of the year. Set up what we charge then tenants on a month by month basis. And then we try to true up on a quarterly basis, make some estimates as to whether or not we think we are going to collect more or not. And those are embedded in here. So sometimes there is some off-cycle stuff. But that happens from time to time. Generally, it is pretty close.

And the $18 million of utility expenses in the quarter, or 19 million,  is that a good rate?

Utilities are funny at this point in time. We have got some buildings now where we pay rates that are set by the hour. So to say that it is a good run rate based on everything I know today, I would say yes. But the information and the costs continually change on an hourly basis.

Okay. And finally on the consolidated joint ventures, the loss recorded for the quarter. I understand you explained the 1.4 million of catch up. But should I make the assumption that because you might be closing this traction next week, that loss -- you won't see any additional loss going forward? Or at least just 1 month of loss associated with Xanadu?

It will probably be 1 month. And I guess it's also -- I want to note about the 1.4, it was offset by about a $1.3 million that we got in additional proceeds from a sale of [inaudible] from many years ago. We had a residual interest there, that Mitchell negotiated in his deal when he did that transaction, which essentially [offsetted] that. So the back -- so the catch up adjustment, essentially was offset to a net 0 between the 2 of those.

And can you explain the spike in loss with the Mack-Green joint venture?

Mack-Green -- the Mack-Green joint venture we only owned for about a month and a half in the prior period, and now we have got a full a quarter. A lot of that is depreciation charges and the like, that go through there.

So the 2.7 million loss on a  -- ?

It was a positive on an NOI basis.

Positive. Okay. All right. Great. Thank you.

David Cohen, Morgan Stanley.

Just a question on some of your weaker assets in your core markets. Do you have any interest in selling more stuff in New Jersey? And do you think there is a bid for that product right now?

We are looking at selling a couple of assets. We have some south Jersey assets on the market right now. We have an asset that we just put on the market through Cushman and Wakefield in Shelton, Connecticut, that is not particularly strategic for us. So we certainly are looking at, and continue to look at our asset base to try to harvest some value out of it.

Can you give us some sense of what type of cap rates we would see on those type of transactions?

I can let you know pretty soon, but because we are expecting the bids on the Shelton asset. I am guessing that we are going to see somewhere around 8s on assets like that set. 7.5 to 8.

Great. You spoke about the flat TIs. And you said that included even very large leases, like the Deutsche Bank. Does that indicate that actual costs are coming down for normal sized leases?

There is no question but that we have been able to push back on some of the concession packages in regards to TI and free rent. So the answer is yes.

Okay. You talked about the $32 million in Xanadu, and you are getting back 25. What is happening to the other 7.5? Is that going to be written off?

No, not at all. People pay for options and optionality every day of the week in this business. And to pay $7 million to have the option to develop almost 2 million feet of office building and a premier hotel at the epicenter of the sports and entertainment and commerce area of New Jersey, I think people ordinarily would pay a lot more than that for options. Particularly, where there is virtually no expiry date on that option. So absolutely not writing it off. And if anything, if you look at the fact that when we take down a piece of land, we get another $2.5 million in cash in exchange for a 5% interest in these residual projects, our core projects, I mean, do the math. 5% , 2.5 million. And then I think you would re-state or re-think the notion that that 7 million should be written off.

Okay. Just a final question. Knightsbridge asset is still very low occupancy. Can you just give us the status on those?

We have in Knightsbridge had some recent showings. It's is no secret, Motorola has gone through the building 4 times recently for 120,000 feet. And so there is that, there is some action, there's some showings. We can be very competitive because of our basis. There is a little bit of action in the marketplace right now, and we are hoping we can pick one off. We are already 60-odd percent leased in the building.

Thank you.

Michael Knott, Green Street Advisors.

Mitchell, just a follow question on the Meadowlands. So the 7.5 million will remain as an investment in the option. Can you remind us of what the actual option costs on the land is per buildable foot?

The hotel is $17,500 a room. It is 520 rooms. The office buildings are $30 in FAR. So when we take down that land, we would fund 75% and Colony would fund 25%.

Thank you.

John Guinee, Stifel Nicolaus.

Other income on the revenue side about 3.9 million. Can you give us a little breakdown as to what that entails?

As I mentioned before, included in the 3.9 million, is about $1.3 million from the tail that Mitchell was able to negotiate on the RCAP transaction that came through this quarter. So if you pull that out, it is right in line with what we have always thought that we would expect in other income.

Is that other income property related or non-property related?

The other income is principally property related. It's the odds and ends of changing light bulbs and doing other things like that for tenants.

Thank you.

James Feldman, UBS.

Where would you put the rent delta in terms of current negotiations with potential tenants for Jersey City that are looking both at Jersey City and downtown?

Based on what Moody's did with Silverstein recently, and they are trying to sell their building on Church Street now. I would tell you that I think the different -- that the rents, of course, he has a very high ask. But I would say that after all of the incentives are provided, and there are still some that exist, or that are obtainable in lower Manhattan, you are probably looking at real rents around $40 a foot, plus or minus. And in Jersey City, we are looking at rents - this is for existing real estate - in the range of $31 a foot. So there is a substantial delta.

Thank you.

And at this time we have no further questions. I would like to turn it back over to management for any additional or closing remarks.

Thank you very much. Well, I want to thank all of you for joining us on today's call. We certainly look forward to reporting to you again next quarter. Thank you again.

Once again, ladies and gentlemen, this will conclude today's conference. We thank you for your participation. You may now disconnect.